For those running their trading business through a company, whether it is cheaper in tax terms to finance a car through the company or outside of it, is something which requires careful calculation.
In a company, the costs of maintaining the car and an element of its capital cost can be relieved for corporation tax purposes (together with an element of the VAT cost if the car is leased).
However, this must be weighed up against the often-sizeable income tax and (for the company) class 1A NIC charge which will apply on the ‘benefit in kind’ resulting from the company making a car available to an employee.
This means from a tax perspective it is frequently the case that receiving a salary enhancement (or car allowance) enabling the car to be financed personally outside of the business is favoured.
However, if considering pure electric cars, the decision whether to include the car inside or outside a company is a little easier, with the corporate route normally being favoured. This is due to the very generous tax reliefs that currently apply to electric (or zero emission) cars.
Your Tax Tuesday author has recently been weighing up the virtues of leasing an electric car to replace his current gas guzzler; apart from being completely astonished (in a good way!) after test-driving one, the tax efficiency of corporate rather than personal provision is the icing on the cake!
Tax considerations are as follows:
- If the car is bought rather than leased, the whole cost can be written off against trading profits for corporation tax purposes in the year of purchase.
- If the car is leased rather than purchased, then the full lease cost can be set against trading profits for corporation tax purposes; the write-down is restricted to 85% for cars with CO2 emissions over 50g/km.
- The benefit in kind charge is incredibly low compared to cars using other fuels (including hybrids).
In the current year this is set at just 1% of the car’s list price (as opposed to up to 37% of list price for other cars), increasing to 2% for the next three tax years.
So, for a very modest income tax (and for the company a class 1A NIC charge), the costs of the vehicle, including servicing, maintenance, fuel (electricity), insurance, provision of charging points at both the employee’s work and home can all be met by (and are tax deductible) the company.
(Note half of the VAT cost on leasing charges can be reclaimed on the quarterly VAT return for a fully VATable business and this applies to any car leased by a company and used privately.)
When weighing up the cost of either the outright purchase of a car or leasing it on a monthly basis, the technological progression of electric cars in recent years and the associated tax reliefs require a very different approach for those deciding whether to put the car into their company.
While monthly payments on a lease or hire purchase of an electric car may seem high, the ‘effective’ cost after the generous tax reliefs currently available often makes the electric car far more affordable than might be expected.
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